In the current high-interest-rate environment, credit cards have become one of the most expensive forms of borrowing. Despite this, many cardholders still choose to roll over a portion of their balance to the next month for continued use. According to data from the Federal Reserve Bank of Boston, at least one-third of credit card users engage in this revolving debt behavior.

However, a recent research paper published by the Federal Reserve Bank of Boston shows that when credit card interest rates change, cardholders do not passively accept the changes, but actively adjust their spending behavior. This finding provides an important perspective for understanding consumers' rational responses during periods of high interest rates.

For every 1 percentage point increase in interest rates, credit card spending decreases by an average of 9%.

Researchers have found that for every 1 percentage point increase in the annualized rate of return (APR) on credit cards, credit card spending decreases by an average of about 9% the following month. This magnitude is considered by researchers to be economically significant, indicating that consumers are quite sensitive to changes in borrowing costs.

The report further points out that when borrowing becomes more expensive and consumers reduce credit card spending, their overall debt burden also eases accordingly. This mechanism demonstrates that interest rate policy plays a direct role in influencing household consumption and debt levels.

Ted Rossman, senior industry analyst at Banclays, said many people slow down their spending as much as possible when interest rates rise. He added that the same phenomenon exists when gasoline prices rise, with evidence showing that recent increases in oil prices have led many to reduce driving and combine trips. Therefore, consumer spending may be more rational than many people realize.

How Federal Reserve policies are directly transmitted to credit card interest rates

Credit card interest rates are typically closely linked to the prime rate, which is generally about 3 percentage points higher than the federal funds rate set by the Federal Reserve. When the Federal Reserve adjusts interest rates, the prime rate changes accordingly, and credit card interest rates often adjust accordingly within one or two billing cycles.

Following multiple interest rate hikes by the Federal Reserve in 2022 and 2023, average credit card interest rates rose from slightly above 16% to over 20%, reaching a record high in 2024. Since then, rates have fallen slightly, currently averaging around 19.58%.

While some reports indicate that some cardholders carrying balances are unaware of the actual interest rates they are incurring, Matt Schulz, chief credit analyst at Lundintree, stated that this latest data shows cardholders carrying balances are highly sensitive to changes in credit card interest rates and will adjust their behavior, at least to some extent, when rates change. He considers this a positive development.

Different groups react significantly differently to changes in interest rates.

Boston Federal Reserve economist Falk Brauning points out that consumers with tighter financial situations react most strongly to interest rate changes. For cardholders who carry a monthly balance, a 1 percentage point increase in the annual interest rate could reduce their spending by up to 15% the following month . He adds that this is mainly because these borrowers have relatively limited financial resources and difficulty accessing other credit channels. He emphasizes that whether someone is a revolving creditor is highly correlated with their overall financial situation.

In contrast, cardholders who consistently pay off their credit card balances in full each month do not react significantly to interest rate changes. The report explains that if cardholders do not need to pay interest, higher interest rates do not directly increase their purchasing costs, a result that aligns with intuitive logic.

Ted Rossman further analyzed that this phenomenon also reflects the obvious characteristics of a K-shaped economy: even as low- and middle-income families cut spending, high-income families continue to drive the economy forward.

The Fed's next policy move remains uncertain.

Since December of last year, the federal funds rate has remained stable within the target range of 3.5% to 3.75%, and credit card rates have also remained largely unchanged. According to the CME Group's FedWatch Tool, the futures market currently indicates that the likelihood of a rate cut at the next meeting (April) is virtually zero. The market widely expects the Fed to keep interest rates unchanged for the first half of this year.

Meanwhile, rising energy costs and growing concerns about stagflation are prompting some market participants to consider that the Federal Reserve's next move might be an interest rate hike. Just last Friday morning, futures market traders even increased the probability of a rate hike by the end of 2026.

However, on Monday (March 30), Federal Reserve Chairman Jerome Powell said that inflation expectations appear to be well anchored, so the central bank does not need to raise interest rates for the time being.

In conclusion , despite high credit card interest rates, recent research shows that cardholders, especially those with outstanding balances, react rationally to rising rates by proactively reducing spending to alleviate debt burdens. This finding helps to better understand consumer behavior in a high-interest-rate environment. Meanwhile, the future policy direction of the Federal Reserve will continue to have a significant impact on credit card interest rates and household consumption.

Investors and ordinary cardholders need to pay close attention to the Federal Reserve's policy signals and changes in external factors such as energy prices in order to plan their finances in advance. In the current complex economic environment, rational consumption and prudent borrowing are particularly important.